After a Federal Reserve-induced multi-year rally in equities, exchange traded fund investors pulled out of U.S. stocks and shifted into international markets where people may still find more attractive valuations.
For instance, the WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ) was the most popular ETF of 2015, attracting close to $14.0 billion in net inflows year-to-date, according to ETF.com. HEDJ capitalize on being at the right place at the right time as the fund tracks Eurozone companies with significant exposure to exporters while hedging against a weakening euro currency. With the European Central Bank enacting low rates and quantitative easing, investors jumped at the potential growth opportunity in European markets. [Europe ETFs Bounce on Improved Outlook for Exporters]
Along the same thought process of capturing overseas growth while hedging potential foreign exchange risks, the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEArca: DBEF), which tracks and hedges currency risk of Europe, Australasia and Far East countries, saw $12.7 billion in net inflows this year. [Smart Beta ETFs Catching on with Financial Advisors]
Additionally, a number of non-hedged international ETFs also attracted a lot of attention this year. For instance, in 2015, the iShares MSCI EAFE ETF (NYSEArca: EFA) saw $9.1 billion in net inflows, iShares MSCI EMU ETF (NYSEArca: EZU) brought in $7.3 billion, iShares Core MSCI EAFE ETF (NYSEArca: IEFA) attracted $6.3 billion and Vanguard FTSE Developed Markets ETF (NYSEArca: VEA) added $5.9 billion.
EFA tracks an MSCI Index of developed Europe, Australasia and Far East countries. IEFA also follows EAFE countries but is cheaper and has greater small- and mid-cap exposure than EFA. EZU holds European Monetary Union companies. Lastly, VEA also tracks developed markets outside the U.S.
Meanwhile, ETF investors mainly pulled out of U.S. stock-related funds this year. For instance, the SPDR S&P 500 ETF (NYSEArca: SPY) saw almost $41.0 billion in net outflows this year. Investor, though, funneled $12.5 billion into Vanguard 500 Index (NYSEArca: VOO), which suggests that some long-term investors may be switching to the cheaper 0.05% expense ratio found in VOO, compared to the 0.09% fee for SPY.
While growth stocks outperformed this year, the PowerShares QQQ (NasdaqGM: QQQ), which tracks the Nasdaq-100, saw $3.2 billion in outflows and iShares U.S. Technology ETF (NYSEArca: IYW) lost close to $2.0 billion.
Other unloved sector ETFs include the Industrial Select Sector SPDR (NYSEArca: XLI), which experienced $2.8 billion in outflows, and Consumer Staples Select SPDR (NYSEArca: XLP), which saw $2.3 billion in outflows. [Don’t Expect Much From This Sector ETF in 2016]
Given the low inflation outlook, expected Federal Reserve rate hikes and rising U.S. dollar, investors pulled $2.1 billion from SPDR Gold Shares (NYSEArca: GLD). [Gold ETFs Dither After Fed Raises Rates]
Investors also yanked $2.0 billion from the broad small-cap ETF, iShares Russell 2000 ETF (NYSEArca: IWM), which tracks the Russell 2000 index.
The emerging markets were also shunned by investor this year, with the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and iShares MSCI Emerging Markets ETF (NYSEArca: EEM) seeing $6.6 billion and $2.8 billion in redemptions, respectively. This suggests that investors have been more confident in developed economies this year as volatility continued to shake global markets and ahead of a Fed interest rate hike that would cause investors to exit riskier emerging countries.
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Full disclosure: Tom Lydon’s clients own shares of QQQ and XLP.
Max Chen contributed to this article.